Financial Crisis, Trade, and Fragmentation
AbstractMotivated by the Asian financial crises that began in 1997, this paper adds money to a Ricardian model of international trade in order to explore the role of financing costs in general-equilibrium trade. The purpose is to show not only that financing costs matter, but to argue a potentially important effect of a financial crisis. If financial markets suddenly come to expect a country's currency to depreciate, as might happen if it has attempted an unsustainable peg, then that expectation will itself force a depreciation. The depreciation will in turn make it impossible for international traders to repay their financing, and their default will increase the costs of financing trade in subsequent periods. Finally, this crisis-induced increase in costs of trade financing then undermines both trade itself and the gains from trade. The paper also goes on to argue that fragmentation - he splitting of production processes across countries - contributes to both trade and the gains from trade, but in doing so it makes countries more vulnerable to these effects of a financial crisis.
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Bibliographic InfoPaper provided by Research Seminar in International Economics, University of Michigan in its series Working Papers with number 458.
Length: 37 pages
Date of creation: 2000
Date of revision:
FINANCIAL CRISIS ; INTERNATIONAL TRADE;
Find related papers by JEL classification:
- F10 - International Economics - - Trade - - - General
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
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- Nicolas Berman & Antoine Berthou, 2006. "Financial market imperfections and the impact of exchange rate movements," Post-Print halshs-00118834, HAL.
- Deardorff, Alan V, 2001.
"International Provision of Trade Services, Trade, and Fragmentation,"
Review of International Economics,
Wiley Blackwell, vol. 9(2), pages 233-48, May.
- Deardorff, A.V., 2000. "International Provision of Trade Services, Trade, and Fragmentation," Working Papers 463, Research Seminar in International Economics, University of Michigan.
- Deardorff, Alan V., 2001. "International provision of trade services, trade, and fragmentation," Policy Research Working Paper Series 2548, The World Bank.
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